It was bad enough last week when it looked as though the central bankers who occupy the Olympian heights of the US Federal Reserve had been panicked into a massive interest-rate cut by the testosterone-driven equity selling of jittery traders from Hong Kong to Frankfurt.

It got much worse when it appeared by the weekend that the Fed's historic three quarter percentage point cut may actually have been occasioned by a single case of alleged fraud at a large French financial institution.

And yet, just as we might not know for a while exactly how much of last Monday's global financial losses were owed to the efforts of Jérôme Kerviel, Société Générale's answer to Nick Leeson, the man who broke Barings more than a decade ago, so we may have to remain in the dark about precisely what prompted Ben Bernanke, the Fed Chairman, and his colleagues to hit the panic button.

In the wake of the rate cut last week, a number of theories buzzed around the newswires. A popular one was the idea that the Fed was privy to some horrific new details on the scale of the losses at the monoline bond insurers, already in the tank for billions of dollars. This is a far-fetched idea. Not only is it almost always not the case that the Fed's monetary policy is informed by some specific inside knowledge - sorry, conspiracy theorists - but it is not obvious what a large interest-rate cut was supposed to do for these fragile financial institutions.

An even more intriguing idea was that, with all this talk of a fiscal stimulus in Washington, Mr Bernanke wanted to demonstrate who was really in charge of reviving a battered economy and an almost unprecedented rate cut was surely the way to do it. It would be fun to believe this one (“my stimulus is bigger than yours!”), but it doesn't really fit the more prosaic calculations that usually dominate the proceedings of the Fed's Open Market Committee.

So the most plausible theory seemed to be that the Fed overreacted to market turmoil, in response to what now appears to be merely a large and quite picturesque case of financial ineptitude.

But it is, I would argue, more likely that the Fed decision was not quite what it seemed. Economists with a close read on the Fed's actions tell me with a straight - and credible - face that the main aim of the cut was not primarily to avert an impending financial disaster but to give the ailing US economy a shot of monetary cortisone. The rate cut was prefigured, after all, by Mr Bernanke only a week earlier when he testified before Congress on the deteriorating economic outlook.

“In light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary,” he said. “The Federal Open Market Committee will, of course, be carefully evaluating incoming information bearing on the economic outlook. Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.”

The key phrase here is “substantive additional action”. Markets initially interpreted this as meaning a likely rate cut before the next Open Market Committee meeting, which takes place today and tomorrow. When one didn't immediately materialise, they assumed that the Fed was planning to cut at that meeting, not before it.

But what if Mr Bernanke intended to do both - cut before the meeting and then cut some more on the appointed day? Having been, perhaps, a little slow to react in advance to the economic downturn that seems to have begun in the last quarter of last year, Mr Bernanke may want to frontload as much as possible of the additional easing that he now deems necessary. He probably couldn't cut the fed funds rate by a whole percentage point or more at this week's meeting - that really would have looked like panic - but he could get at least as much of the desired effect, if not more, by doing it in two chunks, one a week before the meeting and one a week later.

I find this a mostly plausible explanation of what happened last week, certainly better than the rather juvenile idea that the Fed jumped to attention when equity markets insisted on support. It may not be the whole picture. It's surely the case that Mr Bernanke, a keen student of the connection between financial distress and real economic pain, was prompted at least in part by the dismal performance of financial markets in the few days or so before making his move last week. Yet this is not the same as saying that the Bernanke put has now replaced the Greenspan put. Both Mr Bernanke and his predecessor Alan Greenspan understood that there is an asymmetry between policy responses to bull markets and bear markets. Sharp discontinuities in stock prices tend to occur in a negative direction and the psychological impact on the investor and consumer is itself asymmetric, much larger in the case of a downturn than an upswing.

It seems safe to say that it was fear for the economy that was the main reason for the Fed's actions, not the need for stability in equity markets. The more interesting question is whether the Fed might be overreacting to that economic fear. The recent data show the US economy still growing in the last month or so, albeit slowly.

But perceptions matter. When they meet today and tomorrow, the Fed's policymakers might not ideally want to be quite so aggressive as they were a week ago, given the economic picture. But if they don't deliver the expected half-point cut, will it be interpreted as an implicit acknowledgment that they were duped by a dodgy futures trader in Paris?

gerard.baker@thetimes.co.uk

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